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Why Peace Makes Economic Sense

Terrorism exacts too high a price.

06/06/2017 8:34 AM IST | Updated 06/06/2017 2:54 PM IST
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Terrorism has a heavy cost, across a spectrum of areas, including economic. In present times, there has been a disturbing spurt in terrorist activities on a global scale. This shall undoubtedly dampen the glow of the projected economic recovery over 2017 and 2018. The IMF expects the world economy to rise from 3.1% in 2016 to 3.5% in 2017 and further to 3.6% in 2018. Terrorism is one of significant challenges standing in the way of these optimistic projections. In addition to the damage to and loss of life and property, such activities threaten the very social, political and cultural setup of the affected nations. And when national integrity is endangered, everything else takes a back seat, including socio-economic growth and development.

It is indeed difficult to quantify even an approximate economic cost of terrorism. However, there is an apparent relationship between terrorist attacks and market volatility. Security shocks caused by terrorist attacks have daunting implications for economic market— both in the short as well as the long run. They have the potential to negatively influence several aspects of the national economy, ranging from investment, banking, infrastructure, to tourism, consumer confidence and even labour productivity. Even following India's surgical strikes on eight terror camps in Pakistan-occupied territory, the Sensex registered a nearly 600 point drop.

Even following India's surgical strikes on eight terror camps in Pakistan-occupied territory, the Sensex registered a nearly 600 point drop.

If carried out against important global financial institutions or multi-national entities, repercussions of terrorist activities extend beyond national boundaries. By challenging the security system within a nation, these violent attacks lead to tougher visa/entry requirements among other things, which again lends an economic blow to the nation owing to the obstruction to international labour mobility. In a note, the research wing of the investment bank Evercore ISI mentioned:"The connection between the terror threat and migration flows threatens to rupture the border-free Schengen zone." The political implications of terrorist attacks can be gauged by this another statement made in the note, "It [terror attacks in Paris] challenges Merkel's position at home and in the wider EU, nudging higher the tail risk that Europe's indispensable leader could fall from power." In addition, with tougher laws and cross-border regulations, international trade and manufacturing operations get affected negatively. For economies which are relatively more dependent on these economic activities, this could do immeasurable harm and escalate the economic cost of terrorism.

It has been observed that developed countries, with their well-developed financial and internal security systems, possess a remarkable resilience to terrorist acts. Reports point out that the GDPs of Spain and UK did not suffer any significant losses post the 2004 Madrid train bombings and the 2005 London subway attacks respectively. Similarly, after the US attack of 9/11 its GDP barely declined by 0.5 percentage points and the stock market recovered all losses in a month's time. An analysis by The New York Times pegged the cost of physical damage at $55 billion, economic damage at $123 billion. It was the same for the Paris attacks, when France's CAC-40 index dropped only by 0.1 percentage points. However, this is not true for all nations.

Countries that constantly grapple with violent acts of terrorism suffer huge economic damage. This is particularly intense for small nations which are highly dependent on the tourism industry as a major source of their GDP and employment. For example, Russia and the UK's decision to halt flights to Egypt after downing of a Russian passenger plane over Sinai, led to an estimated cost of $280 million per month due to flight cancellations alone to Egypt's already distressed economy. This is no small deal for a small country already suffering from internal political and economic problems.

Clearly, without the burden of having to deal with the menace of terrorism, global economic growth and development could be significantly higher.

Countries like Syria and Iraq, which are constantly caught in internal wars, now suffer additionally from inflation, unemployment, inadequate infrastructure (both social and physical) as well as problems of labour movement. Clearly, optimal resource allocation is merely a hopeful dream for these countries. Where the fight is for survival, economic growth and holistic human development are not even considerations.

Another aspect of the economic cost of terrorism relates to the cost of "fighting" terrorism. The New York Times estimated the cost of developing the Homeland Security Department post the 9/11 attack at $589 billion, war funding at $1.6 trillion, and the continuing cost of following wars and caring for veterans at $867 billion. American national security budget expert, Gordon Adams, estimates that the USA spends a minimum of $100 billion annually on counter-terrorism efforts. The USA's Special Operations Forces, dedicated to counter-terrorism efforts, alone has a budget close to $10 billion.

Moreover, countries are compelled to boost their military expenditure and trade funds that could otherwise be used for inclusive and holistic development to build-up artillery and weaponry. According to the Stockholm International Peace Research Institute (SIPRI) estimates of 2015, the USA had the maximum military spending of $596 billion, followed by China and Russia. With $51.3 billion, an emerging economy like India was placed sixth in the list. Increasing activities of terrorism and rising global tensions were clearly reflected in the total world military spending of $1.67 trillion.

Clearly, without the burden of having to deal with the menace of terrorism, global economic growth and development could be significantly higher. Resources could be allocated to help fight critical issues such as poverty, malnutrition, illiteracy, employment generation, gender sensitisation and infrastructure development, to mention a few. In the words of Nobel Laureate Muhammad Yunus, "We must address the root cause of terrorism to end it for all time...I believe putting resources into improving the lives of poor people is a better strategy than spending it on guns." It is clean that ensuring peace internationally is a must in today's globally integrated world.

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